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Reasons To Remain Bullish On Gold

October 21st, 2013

gold-bullMoe Zulfiqar: In 2008, when the key stock indices started to plummet after Lehman Brothers fell, there was uncertainty across the board. There was too much noise, and the direction of key stock indices was very unpredictable. The bottom was not placed until March of 2009.

Fast-forwarding to today, we have one market that’s seeing something similar: gold. Gold bullion isn’t liked by many these days, to say the least; it’s not uncommon to hear something along the lines of how the store of value doesn’t hold value itself anymore. The gold bears love what’s happening in the gold bullion market, and will take any chance they get to talk against it.

That said, I remain bullish on the shiny yellow metal.

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My argument remains the same, and it’s very simple: the demand for gold bullion is increasing, and with prices remaining suppressed, the supply will decline. The basic rules of economics are at play here.

Where’s the demand coming from?

In April, when the price of gold bullion dropped on speculation that the easy money will be out of the system and the Federal Reserve will start to normalize its monetary policy—we’re still waiting to see it happen—there was speculation that gold bullion buyers would eventually run out. It was believed they would stop buying the precious metal once the prices remained in stress for some time.

They were wrong; we actually have been seeing buyers still in the market.

One of the buyers of gold bullion is the central banks, and I closely watch what they do. This is because they are big buyers and can affect the price of gold significantly. They’re still buying, and you have to keep in mind that they are very conservative investors.

According to the International Monetary Fund, Russia’s central bank, which has the seventh biggest gold reserves in the world, bought the largest amount since December 2012, increasing its gold bullion reserves by 12.722 tonnes to 1,015.521 tonnes. (Source: Ananthalakshmi, A., “Turkey tops central banks’ gold buying in Aug – IMF,” Reuters, September 25, 2013.)

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